Trade war and Brexit pose mounting risk to EU economy, says EC

2 weeks ago

European commission warns of ‘major shock’ and slashes growth forecast for the union

The threat of a full-blown trade war between the US and China and Brexit uncertainty are posing mounting risks to the EU economy, the European commission has warned, after downgrading its growth outlook for 2019.

Brussels’ executive arm said a recent slowdown in global trade
volumes had taken its toll across the continent, as it cut its GDP
growth forecast for the 28-nation bloc for 2019 to 1.4%, down from a
forecast of 1.9% in the autumn.

Sounding the alarm as tensions between the US and China threaten to boil over ahead of crunch meetings between the two countries later this week, the commission warned that further escalation of trade conflicts around the world could trigger a “major shock” for the EU.

Brexit uncertainty has weighed on growth, while the lingering risk of a disruptive no-deal scenario threatened the strength of the economy in future. It said Britain would be harmed most, but that the UK crashing out without a deal would also harm the EU 27.

The warning came after Donald Trump threatened to raise US import tariffs to 25% on as much as $525bn (£402bn) of Chinese goods, possibly from as early as Friday, as the talks between Washington and Beijing could break down in acrimony.

While there are hopes that Trump is using the threat as a bargaining tool he will not ultimately deploy, stock markets around the world tumbled after the president issued the threat. The FTSE 100 closed down 120 points, or 1.63%, at 7260 and the Dow Jones was 1.7% – 442 points – at 25,996 by lunchtime on Wall Street. Previous reports had suggested a deal over trade was close.

Christine Lagarde, the head of the International Monetary Fund, warned that further escalation would damage the global economy.

“For us at the IMF, it’s imperative that trade tensions are resolved
in a way satisfying for everyone because clearly tensions between the
United States and China are the threat to the global economy,” she said.

The forecast for slower growth in 2019 from the EU reflects the
weaker prospects of certain countries in particular. Italy is forecast
to only grow by 0.1% this year, and is also set to breach EU rules for
its government budget by a wide margin.

The Italian government’s budget deficit is expected to rise to 3.5% of GDP in 2020 as economic growth slows, up from 2.5% in 2019, putting it on another collision course with Brussels after a flare-up last year.

Germany’s growth rate was cut to 0.5% in 2019 from a previous forecast of 1.8%, as faltering international demand for exports weigh on the economy, as well as Brexit uncertainties and hiccups in the car manufacturing sector. Germany only narrowly managed to avoid recession in the second half of 2018.

UK growth was slightly upgraded by 0.1 percentage points to 1.3% this
year, after a better-than-expected performance at the start of 2019.
The forecast does, however, assume the status quo of trading relations
between the UK and the EU due to a lack of progress in the Brexit
process, with the risk that a no-deal departure could damage the UK
economy.

Valdis Dombrovskis, vice-president for the euro and social dialogue, said: “Risks to the outlook remain pronounced … these include further escalation of trade conflicts and weakness in emerging markets, in particular China. In Europe, we should stay alert to a possible no-deal Brexit.”